Introduction
Institutional Analysis
Empirical Analysis
Interpretation
Conclusion
Quantities and Prices in China’s
Monetary Policy Transmission
From Window Guidance to Interbank Rates
Naoyuki Yoshino1
Stefan Angrick2
1 Dean,
Asian Development Bank Institute (ABDI), [email protected]
Professor Emeritus, Keio University, [email protected]
2 National
Graduate Institute for Policy Studies (GRIPS),
[email protected]
The views expressed are those of the authors and not necessarily those of their respective institutions.
Conference on China’s Financial Markets and the Global
Economy, Bank of Finland, 15 September 2016
Naoyuki Yoshino, Stefan Angrick
Quantities and Prices in China’s Monetary Policy Transmission
GRIPS
1 / 29
Introduction
Institutional Analysis
Empirical Analysis
Interpretation
Conclusion
Outline
1 Introduction
2 Institutional Analysis
3 Empirical Analysis
4 Interpretation
5 Conclusion
Naoyuki Yoshino, Stefan Angrick
Quantities and Prices in China’s Monetary Policy Transmission
GRIPS
2 / 29
Introduction
Institutional Analysis
Empirical Analysis
Interpretation
Conclusion
Introduction
In most advanced economies (esp. pre-crisis): one central
bank, one major tool, one central target
Post-crisis also macroprudential ↔ financial stability
China: multiple actors, multiple tools, multiple targets
Quantity-oriented tools and targets
Analyse one transmission channel of monetary policy in China:
Major tools → Bank financing → Real economy
Focus on role of interbank rates, window guidance, structural
change
Naoyuki Yoshino, Stefan Angrick
Quantities and Prices in China’s Monetary Policy Transmission
GRIPS
4 / 29
Introduction
Institutional Analysis
Empirical Analysis
Interpretation
Conclusion
Institutional structure
Monetary policy authority: Key competencies shared between
People’s Bank of China (PBOC) and State Council
State Administration of Foreign Exchange (SAFE) manages
capital controls
Targets identified in literature: Price stability, economic
growth/employment, exchange rate target
Intermediate quantity targets: Growth rates of monetary
aggregates, bank credit, commercial bank reserves etc.
Naoyuki Yoshino, Stefan Angrick
Quantities and Prices in China’s Monetary Policy Transmission
GRIPS
6 / 29
Introduction
Institutional Analysis
Empirical Analysis
Interpretation
Conclusion
Monetary policy tools
Figure 1: Monetary policy tools used in China
Market-based
Qtybased
Central bank bill
issuance amount
Targeted central bank
transactions
Repo amount
Credit controls/
window guidance
Required reserve
amount
Pricebased
Non-market-based
Central bank bill rate
Repo rate
(Re-)Discount rate
Capital controls
Benchmark lending
and deposit rates
Regulatory controls
Interest on (required
and excess) reserves
Naoyuki Yoshino, Stefan Angrick
Quantities and Prices in China’s Monetary Policy Transmission
GRIPS
7 / 29
Introduction
Institutional Analysis
Empirical Analysis
Interpretation
Conclusion
Balance sheet of the PBOC
CNY (trillion): Liabilities/Assets
Figure 2: Balance Sheet of the PBOC
Item
Net foreign ex. reserves
20
Government securities
Claims on private sector
Currency in circulation
0
Excess reserves
Required reserves
Central bank securities
−20
Government deposits
Other liab. to private sector
2000
2005
2010
2015
Time
Key differences via-à-vis other advanced economies: Large
forex reserves, high reserve requirements
Naoyuki Yoshino, Stefan Angrick
Quantities and Prices in China’s Monetary Policy Transmission
GRIPS
8 / 29
Introduction
Institutional Analysis
Empirical Analysis
Interpretation
Conclusion
Window guidance
Window guidance: Guidance of commercial bank lending
through official persuasion
Figure 3: Monetary policy indicator
2
Policy stance
Indicator
Monetary policy indicator
Sun 2015
0
Shu−Ng 2010 3−step
Shu−Ng 2010 5−step
Shu−Ng 2010 7−step
−2
2000
2005
2010
2015
Time
Naoyuki Yoshino, Stefan Angrick
Quantities and Prices in China’s Monetary Policy Transmission
GRIPS
9 / 29
Introduction
Institutional Analysis
Empirical Analysis
Interpretation
Conclusion
Estimation approach
Figure 5: Two-step estimation approach
Instruments
1
Bank financing
2
Real economy
Step 1: Monetary policy tools → Bank financing
Step 2: Bank financing → Real economic variables
Naoyuki Yoshino, Stefan Angrick
GRIPS
Quantities and Prices in China’s Monetary Policy Transmission
12 / 29
Introduction
Institutional Analysis
Empirical Analysis
Interpretation
Conclusion
Major monetary policy-related variables
Figure 6: Major monetary policy-related variables
9
6
Variable
Percent
Benchmark rates
Interbank O/N rate
3
Bank fin. pct growth
Avg. RRR adjustment
Monetary policy indicator
0
2000
2005
2010
2015
Time
Not examined: discount rate, interest on requires/excess
reserves
Naoyuki Yoshino, Stefan Angrick
GRIPS
Quantities and Prices in China’s Monetary Policy Transmission
13 / 29
Introduction
Institutional Analysis
Empirical Analysis
Interpretation
Conclusion
Major real-economic variables
Figure 7: Major real economic variables
60
Variable
Percent
Retail sales yoy pct change
40
Industrial value added
yoy pct change
Fixed asset investment
yoy pct change
20
CPI yoy pct change
PPI yoy pct change
0
2000
2005
2010
2015
Time
Limited by choice of data frequency: Monthly-frequency data
Naoyuki Yoshino, Stefan Angrick
GRIPS
Quantities and Prices in China’s Monetary Policy Transmission
14 / 29
Introduction
Institutional Analysis
Empirical Analysis
Interpretation
Conclusion
Structural change
Figure 8: Chow test for structural change
H0 : Constant growth rate of bank financing
F test
Statistic = 6.481, p-value = 0.1326, break point = 2008/11
Figure 9: Growth of credit and monetary aggregates in level terms
2008/11
CNY (trillion)
100
Level variables
M2
M1
Money base
50
Bank financing
0
2000
2005
2010
2015
Time
Naoyuki Yoshino, Stefan Angrick
GRIPS
Quantities and Prices in China’s Monetary Policy Transmission
15 / 29
Introduction
Institutional Analysis
Empirical Analysis
Interpretation
Conclusion
Quantitative analysis
1
Revankar-Yoshino exogeneity test: H0 : IBOR is exogenous
M1PCt = MBPCt + IBORt + RRRCt + MPIt + u1t
(1)
M1PCt = IBORt−1 + BENCHt + IVYOYt + u2t
IBORt = MBPCt + M1PCt−1 + IBORt−1 + RRRCt−1
(2)
+ CPIYOYt−1 + IVYOYt−1 + XRPCt−1 + u3t
(3)
Figure 10: Revankar-Yoshino exogeneity test results
2
χ
df
p
Full sample
Pre-crisis
Post-crisis
58.1857
30.1654
3.9815
2
2
2
0.0000
0.0000
0.1366
Naoyuki Yoshino, Stefan Angrick
GRIPS
Quantities and Prices in China’s Monetary Policy Transmission
16 / 29
Introduction
Institutional Analysis
Empirical Analysis
Interpretation
Conclusion
Structural Vector Autoregression
2
SVAR model:
AYt = C∗0 + C∗1 t + A∗1 Yt−1 + A∗2 Yt−2 + Bet
(4)
where B is unrestricted along diagonal, zero otherwise, and

1
0
0
0
 0
1
0
0

a
a
1
0
A=
 31 32
a41 a42 a43 1
a51 a52 a53 a54

0
0

0

0
1


RRRCt
BENCHt 



Yt = 
 MPIt 
 IBORt 
BFPCt
Naoyuki Yoshino, Stefan Angrick
GRIPS
Quantities and Prices in China’s Monetary Policy Transmission
17 / 29
Introduction
Institutional Analysis
Empirical Analysis
Interpretation
Conclusion
SVAR impulse responses (1)
Figure 11: Step 1 estimations: Cumulated impulse responses (1)
SVAR Cumulated
RRRC −> BFPC
Pre−crisis
Post−crisis
RRRC −> BFPC
RRRC −> BFPC
0.50
0.0
0.0
0.25
−0.4
−0.2
0.00
BFPC
BFPC
BFPC
−0.2
−0.25
−0.8
−0.75
3
6
9
0
3
6
9
0
3
6
9
Horizon
Horizon
Horizon
BENCH −> BFPC
BENCH −> BFPC
BENCH −> BFPC
0.50
0.2
0.25
0.0
0.2
0.0
BFPC
0.4
BFPC
BFPC
0
−0.4
−0.6
−0.50
−0.6
0.00
−0.2
−0.25
−0.2
−0.4
−0.50
−0.4
0
3
6
9
0
3
6
9
0
3
6
Horizon
Horizon
Horizon
MPI −> BFPC
MPI −> BFPC
MPI −> BFPC
Naoyuki Yoshino, Stefan Angrick
0.0
Quantities and Prices0.00
in China’s Monetary Policy Transmission
0.6
9
GRIPS
18 / 29
BENCH −> BFPC
Introduction
BENCH −> BFPC
Institutional Analysis
0.4
BFPC
BFPC
Conclusion
0.0
SVAR impulse responses (2)
0.0
Interpretation
0.2
0.25
0.2
BFPC
BENCH −> BFPC
Empirical Analysis
0.50
0.00
−0.2
−0.25
−0.2
−0.4
Figure
12: Step 1 estimations: Cumulated impulse responses (2)
−0.4
−0.50
0
3
6
9
0
3
6
9
0
3
6
Horizon
Horizon
Horizon
MPI −> BFPC
MPI −> BFPC
MPI −> BFPC
9
0.6
0.0
0.4
−0.50
−0.5
BFPC
−0.25
BFPC
BFPC
0.00
0.2
−1.0
0.0
−0.75
−1.5
−0.2
−1.00
0
3
6
9
0
6
9
0
3
6
Horizon
Horizon
IBOR −> BFPC
IBOR −> BFPC
0.2
9
0.75
0.50
−0.2
0.0
0.25
BFPC
BFPC
0.0
BFPC
3
Horizon
IBOR −> BFPC
0.00
−0.2
−0.4
−0.25
−0.6
−0.4
−0.50
0
3
6
9
0
Horizon
3
6
Horizon
9
0
3
6
9
Horizon
Naoyuki Yoshino, Stefan Angrick
GRIPS
Quantities and Prices in China’s Monetary Policy Transmission
19 / 29
Introduction
Institutional Analysis
Empirical Analysis
Interpretation
Conclusion
Robustness checks & IBOR effects
Robustness checks: Difference vs. level variables, alternative
policy indicator, reversed ordering, credit proxies etc.
Reserve requirements influential but determinacy/significance
varies, benchmarks largely ineffective
Window guidance and interbank rates very consistent,
quantitatively negative, considerable significance level
Effects on the interbank overnight rate: Reserve requirements
and benchmark rates strongly impact interbank rate, effect of
window guidance on interbank rate negligible
Naoyuki Yoshino, Stefan Angrick
GRIPS
Quantities and Prices in China’s Monetary Policy Transmission
20 / 29
Introduction
Institutional Analysis
Empirical Analysis
Interpretation
Conclusion
Real economic effects (1)
Figure 13: Step 2 estimations: Cumulated impulse responses (1)
VAR Cumulated
Pre−crisis
BFPC −> RSYOY
Post−crisis
BFPC −> RSYOY
BFPC −> RSYOY
2
3
−1
−2
1
2
RSYOY
0
RSYOY
RSYOY
1
1
0
−1
0
3
6
0
−1
−2
9
0
3
6
9
0
3
6
Horizon
Horizon
Horizon
BFPC −> IVYOY
BFPC −> IVYOY
BFPC −> IVYOY
0
6
3
9
−1
1
4
IVYOY
IVYOY
IVYOY
2
2
0
0
−2
−3
−4
−1
−5
0
3
6
9
0
6
9
0
3
6
Horizon
Horizon
Horizon
BFPC −> FIYOY
BFPC −> FIYOY
BFPC −> FIYOY
FIYOY
FIYOY
4
9
1
10
8
FIYOY
3
5
0
−1
0
0
−2
0
3
6
9
0
3
Horizon
Naoyuki Yoshino, Stefan Angrick BFPC −> CPIYOY
2.0
6
9
0
3
6
9
Horizon
Horizon
BFPC −> CPIYOY
BFPC −> CPIYOY
0.5
Quantities and Prices in China’s
Monetary Policy Transmission
0
GRIPS
21 / 29
4
Empirical Analysis
2
IVYOY
2
Institutional
Analysis
1
IVYOY
IVYOY
Introduction
0
0
Interpretation
−2
Conclusion
−3
−4
−1
−5
0
3
6
9
0
3
Real economic effects (2)
6
Horizon
0
BFPC −> FIYOY
9
BFPC −> FIYOY
1
FIYOY
FIYOY
6
Horizon
10
4
3
Horizon
BFPC −> FIYOY
8
FIYOY
9
5
0
Figure 14: Step 2 estimations: Cumulated impulse responses (2)
−1
0
0
−2
0
3
6
9
0
3
Horizon
BFPC −> CPIYOY
9
0
0
3
6
1.0
0.5
9
9
0
1.5
0.0
−1.0
6
Horizon
BFPC −> CPIYOY
CPIYOY
CPIYOY
0.0
−0.5
3
BFPC −> CPIYOY
2.0
0.5
CPIYOY
6
Horizon
−1
−2
−3
0
3
Horizon
BFPC −> PPIYOY
6
9
0
3
6
9
Horizon
Horizon
BFPC −> PPIYOY
BFPC −> PPIYOY
4
2
−2
2
PPIYOY
PPIYOY
PPIYOY
0
0
0
−2
−4
−2
−6
0
3
6
9
0
3
Horizon
6
Horizon
9
0
3
6
9
Horizon
Naoyuki Yoshino, Stefan Angrick
GRIPS
Quantities and Prices in China’s Monetary Policy Transmission
22 / 29
Introduction
Institutional Analysis
Empirical Analysis
Interpretation
Conclusion
Capital-market based finance
Figure 15: Aggregate financing to the real economy
100
Percent of total
75
Component
Equity and other
50
Trust loans, acceptances, bonds
Bank loans
25
0
2005
2010
2015
Time
Declining role of banks → declining effectiveness of window
guidance?
Naoyuki Yoshino, Stefan Angrick
GRIPS
Quantities and Prices in China’s Monetary Policy Transmission
24 / 29
Introduction
Institutional Analysis
Empirical Analysis
Interpretation
Conclusion
Interest rate corridor
Figure 16: Interest rate corridor
6
Percent
Rate
4
Discount rate
Interbank O/N rate
Interest on excess reserves
2
2000
2005
2010
2015
Time
Goal to establish interbank rate as primary tool, but volatile
↔ quantity-based tools, but quantity targets still missed
Lack of credible corridor with binding limits
Naoyuki Yoshino, Stefan Angrick
GRIPS
Quantities and Prices in China’s Monetary Policy Transmission
25 / 29
Introduction
Institutional Analysis
Empirical Analysis
Interpretation
Conclusion
Conclusion
Strongest impact on bank financing from interbank rate,
window guidance and reserve requirements
Most consistent: Window guidance and interbank rates,
former strong pre-crisis, latter strong (and exogenous)
post-crisis
Bank financing associated with increasing activity in industrial
sectors and fixed asset investment, but elasticity of real
economy vis-à-vis bank financing lower post-crisis
Improve interest rate channel: Credible interest rate corridor,
lower number of tools, reserve averaging provisions and longer
maintenance periods
Well-established interest rate ↔ Relevance for rebalancing
Naoyuki Yoshino, Stefan Angrick
GRIPS
Quantities and Prices in China’s Monetary Policy Transmission
27 / 29